Hedge bets and buy Man for the long term

Steer clear of recruitment; Henry Boot fails to make a good fit
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The Independent Online

The fall of Man Group has been one of the features of the FTSE 100 over the past three months. One of last year's best-performing stocks, the hedge fund manager has been one of the least successful blue chips of recent months.

Swings and roundabouts. The share price performance has in part reflected the success or otherwise of AHL, its flagship fund. AHL is run by computers programmed to spot emerging investment trends. The trouble is, there have not really been any investment trends this year, with equity, bond and commodities trading in a narrow range.

Last year, AHL had a spectacular run that earnt it bonus fees far beyond investors' imagination. Now it is nigh on 20 per cent below its peak, after another disastrous week at the start of April when it lost money on the oil price spike.

Stanley Fink, the man at the controls, tells us that AHL can expect to suffer a 20 per cent fall once every six or seven years, and has not actually had one in a decade. Last year's strong run was in fact more statistically anomalous.

More significant statistics: Man revealed last month it is now looking after $10.5bn of clients' money, more than anyone had forecast; and yesterday, Man revealed that $280m has been put into its latest fund launch. Although that doesn't match the $400m of several launches last year, the latest fund is a different, less volatile vehicle aimed at attracting a new type of cautious private client. Its successful launch shows Man's expanded distribution network in the US is proving its worth.

About 40 per cent of the new fund will be invested in AHL. Merrill Lynch, Man's broker, made a fair point yesterday in arguing the group sells very few pure-AHL products. So focusing on AHL's performance alone does not provide an accurate picture of Man's likely earnings performance. The important issue is whether hedge funds are still growing in popularity as a way of diversifying portfolios away from the equity markets.

Most City analysts try to ignore the performance-related fees when calculating Man's worth, reckoning that they will provide a nice bonus, but no decent guide to future growth. CSFB reckons Man will generate 67p of earnings in the financial year just started, 58p with performance fees removed. Using the lower figure, the stock (down 27p at 1,061p) is on a price-earnings multiple of 18 – still lower than most asset managers have traditionally traded. New investors should use any further share price weakness to build a long-term holding.

Steer clear of recruitment

Remember the débâcle over the flotation of Michael Page last year, when the recruitment company predicted it would defy the economic cycle only to find that it and its ilk were among the stocks most sensitive to a downturn in economic activity. Businesses have preferred outright hiring freezes to hiring temps at the expense of permanent staff. As business confidence creeps back, and more companies say they may start hiring again soon, the argument for buying recruitment stocks is beguiling, but should be resisted.

Reed Executive yesterday told a tale of two halves to 2001 when it reported profits down 8 per cent to £14.2m. The group is efficiently run, combining a strong online presence with a national branch network, but its discount to the sector won't narrow until the Reed family reduces its 70 per cent stake and throws open the books for more detailed scrutiny. The cost of doing battle with Reed International, the publisher, over the Reed brand in cyberspace, will eat further at profits this year.

Harvey Nash is an even less exciting prospect, having raised just enough in a deeply-discounted fundraising to stave off financial worries, but forced to cut a quarter of its global workforce. Where Reed has been able to offset declines in demand for information technology personnel with its accountancy and insurance staffing business, Harvey Nash is more heavily focused on the New Economy sectors. It is far from clear that the telecoms and technology markets will rebound as quickly as other areas of the economy.

There is yet to be a proper reappraisal of the prospects for the recruiters, but their confirmed cyclical status argues for a below-market rating, rather than the 20-plus p/e ratios that prevailed before the downturn. That is not yet fully reflected in investor expectations, and the sector should be avoided.

Henry Boot fails to make a good fit

Henry Boot is the housebuilder's equivalent of a semi in Surbiton: a safe enough investment but utterly dull.

The bulk of the Sheffield-based Boot's business comes from its housing and property divisions. Like so many of its competitors, they fared well in a benign environment. Much of the impetus for the group's 9.6 per cent increase in pre-tax profit in 2001 came from Boot's new homes business. An increase in the average selling price to £109,000 from £96,000 helped the division's revenues to rise by 28 per cent.

The story was the same in Boot's property development arm where retail schemes, such as developing the Welcome Break's service area at Telford, provide the mainstay. Other interests, which include plant hire and specialist construction, also held up.

While the stock has benefited from the sector's recent buoyancy, the stock market is never likely to fall in love with this family-controlled rag-bag of construction businesses. Cautious noises from the management will do little to help its cause in the near term.

After a rise in pre-tax profits to £13.4m from £12.2m last year, on turnover up 3 per cent to £234m, earnings are expected to remain flat in 2002 because of planning delays. A p/e ratio of 8 times for the shares, at 305p, does not make them cheap enough. Avoid.